Manufacturing spurs unexpected boost in UK economy

The UK economy rose by a healthy 0.5 per cent in the first quarter of the year, mainly thanks to manufacturing recording its fastest growth since 1988.

David Sapsted

10 May 2019

Data from the Office for National Statistics (ONS) showed that manufacturing output increased by 2.2 per cent in the first three months of the year, compared with growth of only 0.3 per cent in the services sector, which accounts for more than three-quarters of the nation's GDP.

Pre-Brexit rush to deliver goods

The ONS attributed much of the rise in the manufacturing sector to a rush by producers to deliver goods ahead of the original Brexit deadline of 29 March.However, economists were encouraged by figures showing that UK business investment rose by 0.5 per cent over the quarter after a year-long slump and by the fact household consumption rose by 0.7 per cent, despite Brexit uncertainty.Chancellor of the Exchequer Philip Hammond commented, “Today’s figures show the economy remains robust, with growth of 0.5 per cent benefiting every major sector. The economy has grown for nine consecutive years, debt is falling, employment is at a record high and wages are rising at their fastest pace in over a decade.“We’re investing at records levels in our infrastructure and skills to boost productivity and wages, which will ensure that Britain is well-placed to seize the opportunities that lie ahead.”

US-China trade war fears

However, Seamus Nevin, chief economist at the manufacturers' organisation Make UK (formerly the EEF), expressed fears that both Brexit and the US-China trade war could combine to damage the economy this year."While we can hopefully look forward to a good summer as firms wind down their emergency Brexit planning, the increasing global economic slowdown and growing trade dispute between China and the US means a downturn is still possible," he said."Output has been artificially boosted in the first part of this year by emergency stock build-ups in preparation for a potential no-deal Brexit. That risk is still not off the table."Tej Parikh, senior economist at the Institute of Directors, said he was concerned that the strong performance in the first quarter might just be, "a flash in the pan".He said, “Some businesses brought activity forward early this year in preparation for leaving the EU, so higher stocks and earlier orders have artificially bumped up the growth numbers. In Q2 many firms will be keen to run down their Brexit caches, which will drag on economic growth."Keen consumers also played a key role in lifting sales in the first quarter, but barring temporary boosts due to weather, households will overall remain cautious in the months ahead.

Uncertainty leaves UK economy in limbo

“While the Brexit extension avoided the immediate risk of ‘no deal’, the economy will remain in a state of limbo until there is a clear path out of this situation. Households are still being put off from making big purchases and business leaders are shelving major projects."The economy has undoubtedly displayed some resilience, but if the uncertainty abated we could be building upon this solid base.”Suren Thiru, head of economics at the British Chambers of Commerce, added, “While there was a strengthening in UK GDP growth in the first quarter, the headline figure has been flattered by a temporary boost from stockpiling ahead of a possible no-deal exit, and so does little to alter the UK’s underlying growth trajectory."There was also a marked loss of momentum through the quarter from the strong January outturn to output contracting slightly in March."The latest data suggests that the UK economy remains imbalanced, with rising consumer spending set against a growing trade deficit. The UK's net trade position is likely to remain under pressure over the near term as exchange rate volatility, Brexit uncertainty and the prospect of an escalating US-China trade war increasingly weigh on trading conditions for UK exporters.

Growth likely to be squeezed in the next two quarters

"The pick-up in growth in Q1 is likely to prove to be a high point for the UK economy this year, with the unwinding of stockpiles, together with the relentless uncertainty and increasing cost pressures caused by the ongoing Brexit impasse likely to squeeze economic activity in the next couple of quarters."It is, therefore, vital that ministers and parliament outline a clear path forward on Brexit, and do more to tackle the long-standing domestic challenges for the UK economy – from weak productivity to a growing skills gap and the need to invest in transformative infrastructure projects that will boost growth across the UK."

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